Planning for retirement involves more than simply accumulating wealth.  It includes preserving your legacy and ensuring that your assets are distributed as you desire. If not properly managed, estate taxes can significantly reduce the value of your estate, which may lead to less being passed on to your heirs.

Charitable contributions are an effective way to minimize estate taxes while supporting meaningful causes. Integrating philanthropy into your estate plan can create a lasting impact while reducing your taxable estate.

Understand estate taxes

The federal estate tax applies to estates that exceed a certain exemption threshold at the time of death. As of January 1, 2025, estates valued above estate tax exemption of $13,990,000 per person are subject to federal estate taxes. This exemption is subject to change based on legislative adjustments, making it critical to stay updated on tax laws.

For individuals and families with significant assets, estate taxes can take a substantial portion of the wealth intended for heirs. Without proper planning, beneficiaries may face substantial tax liabilities, which could force the sale of valuable assets or family businesses. Fortunately, strategic charitable giving can be a powerful tool to mitigate estate taxes and ensure a portion of your wealth supports causes that matter to you.

The role of charitable contributions

By qualifying for charitable contribution deductions, you can significantly reduce the taxable value of your estate. 

Any assets left to qualified charitable organizations are excluded from the estate’s taxable total, which can lower or eliminate estate tax liability. This approach allows you to direct your wealth toward philanthropy rather than taxes.

Beyond the tax benefits, charitable giving provides an opportunity to establish a legacy. Whether you support education, medical research, religious institutions, or social causes, your contributions can have a lasting impact long after you are gone. Many high-net-worth individuals establish charitable foundations to continue their philanthropic efforts over multiple generations.

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Strategic giving options

Several estate planning tools enable individuals to integrate charitable giving into their legacy planning while maximizing tax advantages. Below are some of the most effective methods:

1. Bequests in your will: You can specify charitable organizations as beneficiaries, directing a portion of your estate to the charity upon your passing. This is one of the simplest ways to ensure a legacy of giving.
2. Charitable remainder trusts (CRTs): A CRT allows you to transfer assets into a trust that provides income to beneficiaries for a designated period. After that period, the remaining assets are donated to your chosen charity. This strategy offers estate and income tax benefits while ensuring financial support for heirs.
3. Charitable lead trusts (CLTs): Unlike CRTs, a CLT provides regular payments to a charitable organization for a specified time, after which the remaining assets are transferred to your heirs. This method can significantly reduce gift and estate taxes.
4. Donor-advised funds (DAFs): A DAF allows you to contribute funds to a charitable account, receive an immediate tax deduction, and distribute donations to charities over time. DAFs provide flexibility in managing charitable giving while maximizing tax advantages.
5. Qualified charitable distributions (QCDs): Individuals over 70½ years old can transfer up to $108,000 per year directly from their IRA to a qualified charity. These distributions count toward required minimum distributions (RMDs) and are excluded from taxable income.

Considerations for effective planning

To ensure your charitable contributions effectively reduce estate taxes, consider the following:

• Qualified organizations: Contributions must be made to IRS-recognized charities to qualify for tax deductions.
• Documentation: Proper records, including receipts and acknowledgment letters, are essential for substantiating deductions and IRS compliance.
• Annual limits: Be aware of limitations on charitable deductions based on your adjusted gross income (AGI). Contributions exceeding the limits can often be carried forward to future tax years.

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The impact of legislative changes

Estate and tax laws are constantly evolving. The Tax Cuts and Jobs Act of 2017 temporarily increased the estate tax exemption, but this provision expires in 2025. If the exemption is reduced, more estates may be subject to federal taxes, making proactive estate planning even more critical.

Policymakers continue to debate changes in estate tax laws, including potential increases in tax rates and reductions in exemptions. Staying informed about these developments can help you adjust your estate plans to minimize tax burdens.

Establishing a charitable legacy

For many, charitable giving extends beyond tax benefits, reflecting their values and long-term impact goals. Establishing a family foundation, endowment, or scholarship fund allows for structured philanthropy while fostering a culture of giving among future generations.

Many families use charitable giving as an opportunity to engage younger generations in philanthropy, instilling values of generosity and social responsibility. Involving family members in donation decisions through a foundation or donor-advised fund ensures that charitable initiatives continue for decades.

Wealth preservation and philanthropy

Combining charitable giving with other estate planning strategies can create a balanced approach to wealth preservation. 

Using life insurance policies to replace donated assets can provide financial security for heirs while maintaining philanthropic commitments. Establishing trusts that incorporate charitable and non-charitable beneficiaries can ensure a legacy of giving while protecting family wealth.

Another strategy is leveraging charitable gift annuities, which provide donors with fixed lifetime income while leaving the remaining assets to charity. These annuities balance financial security with philanthropic intent, offering income and estate tax benefits.

Final Thoughts

Charitable giving is a powerful strategy to reduce estate taxes while supporting meaningful causes. Whether through direct bequests, trusts, donor-advised funds, or other vehicles, integrating philanthropy into estate planning offers tax advantages and the opportunity to leave a lasting legacy.

As tax laws and exemption thresholds change, working with a knowledgeable estate planning professional ensures that your charitable giving strategy aligns with your financial goals. Thoughtful planning allows you to maximize tax benefits, preserve wealth for heirs, and significantly impact the causes that matter most to you.

Disclaimer: Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through TOP Private Wealth, a registered investment advisor and separate entity from LPL Financial.